David Jones - Free Essay Example

DAVID JONES 8th October 09 Strategic Recommendations Report 08 Fall Executive Summary The Australian retail industry is experiencing significant changes in both macro and industry environments. Companies are required to improve customer service quality to retain customers as rivalry for customers is increasing due to the rising amount of online retailers. To meet this challenge, David Jones should expand into online retailing. Building customer loyalty will determine the viability of the transformation into a successful e-commerce company. Additionally, identification of stakeholders and their requirements are crucial in major organisational changes. To respond to changes in the external environment, David Jones should scale back on capital expenditure on its existing business model and invest in technology to build a cutting-edge e-commerce platform. Improving the efficiency of existing operations would secure the financial position of David Jones, while resources are devoted to the new business model. Employee empowerment and establishing customer loyalty levels would realise higher customer service and build loyalty for current and future operations. These organisational changes would not only result in improved shareholder value, but also meet demands from different stakeholder groups. Table of content 1. INTRODUCTION3 2. EXTERNAL ENVIRONMENT ANALYSIS3 2. 1. Macro Environment3 2. 2. Industry Environment4 2. 3. Internal Analysis and Strategy4 3. STAKEHOLDER ANALYSIS5 3. 1. Primary Stakeholders5 3. 2. Secondary Stakeholders6 3. 3. Social and Institutional Pressures and Trends7 4. STRATEGIC RECOMMENDATIONS7 4. 1. Development of Future Operations7 4. 2. Improvements in Existing Operations8 5. ORGANISATIONAL IMPACT10 5. 1. E-commerce platform10 5. 2. Customer loyalty programs10 5. 3. Employee Empowerment11 6. CONCLUSION11 7. REFERENCE LIST1 1. INTRODUCTION On behalf of Li Partners consulting firm, we are pleased to present our strategic recommendations report. This report’s primary task is to recommend strategic and organisational changes to deliver growth in shareholder value. To support these recommendations, this report incorporates broad external environment and internal capabilities analysis on David Jones. David Jones’ stakeholders are also identified, as is the impact the recommendations have on them. Additionally, a Balanced Scorecard is constructed to illustrate the effect that our strategic recommendations will have on all stakeholders and future company performance. 2. EXTERNAL ENVIRONMENT ANALYSIS 2. 1. Macro Environment Political/Legal| Deregulation in retail industrys trading hours| Economic| Declining consumer spending due to global economic downturn|   | Increasing energy expenditure due to global warming| Socio-Cultural| Increasing demand for better work and social-life balance| Technological| Improvements in IT-Technology | Demographic| Declining work-force due to aging demographics|   | Increasing immigration| Global| Improved international standing of Asian capitals|   | Global protectionism| Table 2. PEST-Analysis The deregulation of the retail industry’s opening hours is expected to have a positive impact on David Jones’ sales (White 2008). On the other hand, declining consumer spending will negatively affect consumer behaviour (Annual report 2008), although government’s stimulus packages are expected to limit this impact (SRJ 2009). Additionally, as people are finding it harder to balance work and family commitments (Australian Government 2009), customer stream is expected to decrease. Global warming is expected to have a negative impact on David Jones’ performance as energy costs are rising (Annual report 2008). Technological improvements in information technology are expected to increase efficiency through the use of Internet and web-enabled processes (Laudon and Laudon 2006). Lower fertility is reducing the supply of workforce. Aging demographics will require David Jones to design its facilities according to this new customer base. Additionally, the increasing overseas migration from Asia (Australian government 2009) will have an impact on consumer behaviour. These demographic groups have higher spending patterns and higher preference for branded products, and hence potentially increasing the market for high quality products (Australian Government 2009). Australia lacks an international image as a major tourism shopping destination, as compared to Hong Kong or Singapore, that have successfully positioned themselves as central shopping and retail destinations in Asia (Folk 2009). Additionally, the geographic distance from Asia reduces tourism shopping in Australia. The rise in protectionism around the world may negatively impact David Jones’ performance due to increasing prices (Kemp 2009). 2. 2. Industry Environment Industry characteristics| High capital requirement and specialised assets| Economies of scale| Brand awareness| Low switching cost| High amount of competitors| Lack of strategic competitors| High amount of suppliers| Emerging e-commerce sites| Table 2. Industry characteristics High capital requirements, specialised assets and economies of scale of existing retailers reduce the incentive of competitors to enter the market. Similarly, the customer loyalty and brand awareness of David Jones’ differentiated product category reduces the incentive to penetrate the Australian retail market (Ondix 2009). While the low switching costs enable consumers to take advantage of the alternatives available to them, the lack of strategic equivalents to David Jones limit consumer’s options. The vast amount of suppliers reduces the threat of forward integration. Suppliers also want to be associated with David Jones due to its strong brand position in Australia. The threat of existing competition for David Jones is marginal due to the lack of strategic competitors. On the other hand, the rising online apparel stores (Rumble 2000) have the potential of removing all previous entry barriers, resulting in increased competition. 2. 3. Internal Analysis and Strategy David Jones follows a differentiation strategy providing well-known high quality products at high volume. It uses centrally located department stores to reach a large number of consumers. The strategic initiatives at place aim to increase shareholder value through new department stores and refurbishment of existing ones and stringent capital expenditure measures. David Jones has operated under the same brand for 170 years (Annual report 2008) and is thus well recognised in the Australian market. Because its brand signals quality, it has been able to differentiate its business strategy from competitors. Secondly, the long-term relationships with well-known suppliers have secured access to high quality products and exclusive supply deals with premium brands (Interbrand 2009). Thirdly, the successful consumer demand estimation has supported its financial position. Finally, David Jones’ borrowing capacity enables it to utilise emerging investment opportunities. The first three capabilities are a result of its industry experience and are expected to deliver competitive advantage in the future. Therefore, they are sources of sustainable competitive advantage. Borrowing capacity is a result of its current financial position and therefore does not reflect future competitive advantage. Table 3. David Jones’ core competencies and sources of sustainable competitive advantage Inefficient customer data collection and low customer service capabilities are David Jones’ weaknesses. Even though it has a data collection system at place via American Express card (David Jones 2009), the card’s incentives seem distant. Because the incentive scheme is based on earning future customer points (David Jones 2009), customers may not feel inclined to participate. Thus David Jones is unable to maximise its data collection. Data collection is crucial in pursuing high customer retention. Additionally, the lack of employees in department stores prevents high customer service. 3. STAKEHOLDER ANALYSIS 3. 1. Primary Stakeholders Primary stakeholders are groups whose participation is vital to the existence of the David Jones (Clarkson, 1995). These stakeholders are shareholders, employees and management, customers and suppliers. Through annual shareholder meetings and the composition of Board of Directors, shareholders pursue policies that aim to deliver increased shareholder value. David Jones’ customers are quality and brand-oriented people, who desire convenience and location. To meet its customers’ requirements, David Jones offers a high quality product range and updates its product categories on a yearly basis. To offer convenience, David Jones department stores are centrally located (Annual report 2008). Legislation determines employees’ safety and health issues and compensation policies. Additionally, employees expect equal treatment on job enhancement opportunities. Successful execution of employee policies will secure its work force in the future. David Jones aims to align managers’ interest with shareholder value creation by linking director’s compensation with company performance. In 2008, David Jones reported that eight of its Directors had significant share ownership (Annual report 2008). For suppliers, long-term relationships with David Jones offer stable business transactions and positive public image through David Jones’ high standing in the retail industry. David Jones’ decision to open new stores, represents a direct possibility for suppliers to increase demand for their products. Also, David Jones strong financial position provides financial stability for suppliers. 3. 2. Secondary Stakeholders Secondary stakeholders are groups that are influenced by the decisions of David Jones, but are not in direct transactions with it and thus not essential to its survival (Clarkson 1995). These stakeholders include the federal and local government, Australian Securities Exchange and non-governmental organisations (NGOS). The Federal Government is interested in increasing the collected tax revenue. Employment levels are a key concern for local government as they determine the prosperity of the area. For example, David Jones’ strategic plans to open new stores (Annual report 2008) are expected to generate improved taxable revenue and offer new employment opportunities across different communities. David Jones is listed on the Australian Securities Exchange (ASX 2009), which places high disclosure requirements on listed companies. If David Jones does not meet these requirements, it might face financial sanctions and delisting. Delisting, in particular, would negatively impact company’s performance, as it would limit financing sources and adversely impact David Jones’ image. NGOS monitors David Jones over its labour and environmental practices and can therefore exert negative publicity over David Jones. To address these concerns, David Jones has implemented a code of ethics and conducts over its labour policies and established environmentally friendly measures such as recycling, lighting, and air-conditioning upgrades. Additionally, David Jones provides financial support for medical projects on women’ and children’s health initiatives (Annual report 2008). 3. 3. Social and Institutional Pressures and Trends Waddock et al. (2002) state that social and institutional pressures are sourced from rankings, global principles and standards, and pubic reporting in economic, social and environmental performance. Rankings reflect companies standing against selected peer groups, and thus can be a great source of competitive advantage. In 2009, David Jones’ brand was ranked the 12th most valuable Australian brand and valued at 760 million AUD (Interbrand 2009). Because brand rankings have an influence on investor and customer behaviour, David Jones must strive to keep or improve its standings. Labour practices are a major source of social pressure for David Jones, as it needs to prove to the public that its suppliers meet global standards. Therefore, quality and environmental standards such as ISO reflect ethical management behaviour and thus potentially act as a competitive advantage against companies that have not implemented similar standards. David Jones discloses its social and environmental contribution in its annual report (Annual report 2008). In 2005, David Jones received B- standing on its corporate social responsibility, behind many Australian listed companies (RepuTex 2005). Because investors compare David Jones to other domestically and globally listed companies, their corporate social reports serves as a benchmark for David Jones reporting. . STRATEGIC RECOMMENDATIONS 4. 1. Development of Future Operations The technological developments in information technology have enabled e-commerce platforms, resulting in increased competition from online retailers. Due to the growing demand for better social and work life balance, customers are inclined to spend time in department stores. Therefore, online retailers provide a logical solution and will eventually marginalise the need for a traditional department store chains. Additionally, e-commerce platforms enable Australian online retailers to attract global customers as it reduces the geographic distance between markets and expands the target market. Schefter and Reichheld (2000) found that the higher costs of acquiring customers in e-commerce are offset by even faster accelerating future profits. This is due to greater loyalty that can be achieved through the Internet than in the physical world. Because competing e-commerce providers need to market themselves to customers to build trust, David Jones can avoid these costs due to its strong reputation in the retail industry. Schefter and Reichheld (2000) also found that brand loyalty reduces customers’ desire to change online retail sites. Hence, David Jones’ brand gives a clear advantage against its existing and potential competitors in establishing an e-commerce presence. Therefore, we recommend a strategic shift from department store expansion to e-commerce platform. This would require scaling back investments in department stores and directing the cash flow to the development of an e-commerce platform and necessary organisational skills. The e-commerce platform would also offer efficient customer data collection, as every customer would need to sign up as member. By personalising the customer interface, David Jones would be able to offer individual customer service on a large scale. Additionally, an e-commerce platform would offer a more cost efficient solution for product range expansion and direct marketing. These factors would lead to both higher customer satisfaction, retention of existing customers, and less expensive costs of attracting of new customers. This would increase David Jones’ EBIT margin and growth rate. Because e-commerce will scale down capital expenditure on tangible assets, it will reduce tied up capital as well. Thus, we expect e-commerce platform to have a positive impact on future shareholder value. 4. 2. Improvements in Existing Operations Even though our strategic emphasis is to transform David Jones into an online retailer, the efficiency of David Jones’ current operations is crucial in generating cash flow to support the development of an e-commerce platform. Additionally, the more successful David Jones’ current operations are, the higher the attraction of customers for its future e-commerce platform. Therefore, the following recommendations aim improving David Jones’ current operations. The David Jones American Express card is a strategic initiative aimed at increasing customer data collection (Annual report 2008). Even though this initiative will result in an increase in shareholder value through reduction in tied-up net working capital, it fails to capture all the value enhancement opportunities. The lack of customer loyalty classes and visibility between classes are the main reason for the inefficient use of David Jones AMEX card (Loveman 2003). Therefore, we recommend that David Jones establish three classes of customer loyalty cards: Basic, Silver and Gold. The aim is to make customer loyalty levels as visible as possible and to increase incentives (e. g. discounts) as customer reach a higher level. The establishment of customer loyalty programs will lead to higher customer spending per customer and a reduction in marketing expenses through increased customer retention (Loveman 2003). The reliance on department stores prevents David Jones from addressing all customers individually. Because David Jones’ customers are looking for high quality and well-known brands, they expect high customer service. Employees, especially sales personnel, are in the best position to identify the key bottlenecks in David Jones’ customer service and processes. Therefore, we recommend that David Jones empower its employees to improve processes. This recommendation is in line with Total Quality Management principles and its focus on improving customer satisfaction. The adoption of TQM has improved companies’ competitive position (Reed, Lemak and Nero 2000) and the employee empowerment and high customer service have contributed to increased company performance (Samson and Terziovski 1999; Ugboro and Obeng 2000). Linking David Jones’ employee compensation to process improvement would amplify this effect. Hence, we believe that by involving employees in the decision-making process, David Jones’ will improve its customer service capabilities, thus enable it to modify its processes promptly based on customer feedback. Therefore, both customer loyalty classes and employee empowerment will lead to higher customer satisfaction of its existing operations. The improved customer satisfaction would result in higher growth rates and EBIT margin and eventually increased current shareholder value. Additionally, the improved customer satisfaction would increase customer loyalty and enable David Jones to attract more customers for its future e-commerce platform. Therefore, they would have a positive impact on future cash flows as well. 5. ORGANISATIONAL IMPACT 5. 1. E-commerce platform The implementation of an e-commerce platform would have a positive impact on all stakeholder classes. Customers would benefit from improved convenience and lower prices and suppliers from the increased volume and product presence in new markets. For both employees and managers, e-commerce represents an opportunity for re-education. Shareholders and also executives would gain from the improved profitability and thus improved share price. Governments would benefit from the improved profitability through increased tax revenue. The e-commerce platform is more environmentally friendly than department stores and thus would support NGOS demand for environmentally sustainable solutions. The enhanced profitability, organisational change and better environmental impact, would be reflected in David Jones’ rankings. The implementation of an e-commerce platform would result in organisational changes, as e-commerce reduces the need for a department store network and hence manual labour. To reduce the internal resistance from its employees, every employee would be given the opportunity to re-educate to meet the new organisation’s skill requirements. Additionally, the change towards e-business would result in new working capital management issues at supplier level. Because online retailers rely on suppliers to hold inventory, the inventory risk would shift from David Jones to suppliers. To reduce the risk of suppliers’ obsolete inventory, suppliers would be given access to David Jones’ information systems to better coordinate their manufacturing processes. 5. 2. Customer loyalty programs The customer loyalty programs would have a significant impact on customers and only a limited impact on other stakeholders. The enhanced data collection would enable tailoring of processes to deliver higher customer service for customer groups. The enhanced data collection would also offer suppliers the possibility of targeting their products to specific market ‘opinion leaders’, who have a significant impact on market behaviour (Business Dictionary 2009). Employees and managers would gain from their improved personal reputation associated with working for a successful company. Similar to e-commerce platform, the implementation of customer loyalty programs would result in a better performance and thus increase in tax revenue for the government. The enhanced customer satisfaction would be reflected in rankings as well. Customer privacy and fear of deteriorating basic customer service levels are key issues that need to be addressed. Customers may feel disinclined to take part in customer loyalty programs, if it would result in a decline in customer privacy. Therefore, every customer would have the right to choose in the application how much personal information may be used and to what extent. Additionally, basic level customers may fear a deteriorating customer service level as more resources might be directed to higher customer levels. Hence, David Jones should implement standard customer service levels to prevent this from occurring. If these standards were not met, customers would receive compensation on their purchases. 5. 3. Employee Empowerment The empowerment of employees would have material impact on employee satisfaction and profitability. Because employees would be responsible for designing processes and rewarded based on the outcome, it would result in more motivated employees and thus higher customer service. This would have a similar indirect effect on shareholder value, tax revenue and rankings, as the two previous recommendations. Because the employee empowerment would result in a leaner organisation, managers might feel that their power is diminishing and thus oppose it. Therefore, to align organisational change with management interests, managers’ compensation should be tied to the successful implementation of employee empowerment. Additionally, a formal organisational architecture should be replaced with vertical teams comprising members from every part of the organisation. These vertical teams would enable the sales personnel to voice concern and give suggestions on different topics. Managers would lead these teams and thus employees’ personal growth would be directly reflected in their performance. 6. CONCLUSION In this section, a Balanced Scorecard is constructed to illustrate how the strategic recommendations impact shareholder value. The balanced scorecard includes a strategic map, objectives, measures and targets and is presented in the next page. Growth Lower capital EBIT Share Holder Value | -Achieve profitability-Achieve growth-Less physical departmental stores| -EBIT growth-Increase in revenue-Decrease in PP| -25% CAGR in EBIT-6. % growth in revenue-5% increase in CAGR in fixed asset turnover| Broader Customer Base Higher customer service Broader choice Convenience Lower Price Higher Customer Retention | -Personalization of customer interface-Lower total cost for customer-Higher customer retention-Higher customer base| -Clicks per interface-Delivery cost per total transaction-Frequency of customer purchase-Non-member transaction to total transacti on| -One every visit-5 % reduction per month-Basic: 1 month, Silver: 2 weeks, Gold: 1 week-5% reduction per transaction| Virtual Organizationrice Data Collection System Optimized Product Placement -Get all products on site-Get every customer sign as a member-Optimized shelf placement| -Availability of product item online-Number of new member-Number of inquiry per customer| -100%-5% increase in new customer-0 %| David Jones E-commerce Siterice Customer Loyalty Card Lean Organizationrice | -Developing of necessary skills-Build IT support system-Standardization and reallocation of customer-Alignment with strategy| -Employee participation in workshop-Information system availability-Benchmark criteria in place-Organizational change in place| -100%-100%-100% in place-100% in place| FINANCIAL BALANCED SCORECARDBALANCEbBql EMPLOYEE EMPOWERMENT TARGET OBJECTIVES INTERNAL MEASURE LEARNING CUSTOMER DEVELOPING E-COMMERCE STRATEGY MAP CUSTOMER LOYALTY CARDS 7. 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